8. Conclusions

This study has undertaken an assessment of the economic impact
of three variants of
ADT (where
this new tax is charged at a lower rate than the current
APD) each with three
different assumptions on the degree to which the cut in tax is
‘passed through’ to passengers in the form of reduced
fares and / or used by airlines to develop new connections from
Scotland’s airports.

The results of this analysis for the nine possible scenarios we
have examined is summarised in the figure below with respect to the
ADT tax
revenue effects and the estimated
GVA impacts over a
five-year period from 2018-2022.

Figure 8.1: Summary of
GVA &
ADT Tax
Position (2018-2022)

Whilst it is not a direct comparison, the figures here do give a
feel for the potential foregone tax and additional Scotland level
GVA. In five of the
nine cases, the figure for additional
GVA is in excess of
the tax foregone, suggesting that the tax cut under these
permutations would have a net positive effect on these terms.

In terms of the scenarios developed here, the greatest economic
impacts are therefore associated with Scenario 1c – a 100%
cut in Band A, which assumes no reduction in fares and a
substantial supply side response in the short haul sector. This is
turn generates the largest increase in passenger numbers and hence
the biggest economic impact. If the tax cut was focussed only on
Band B (long haul) the analysis undertaken here suggests that the
additional
GVA in this initial
five-year period would not offset the loss of tax revenue. Note
though that in the scenarios where fares are reduced, the benefits
will continue to grow year on year beyond this initial five-year
period. For scenarios where there is only a supply side response,
this is represented as a step change followed by a continuation of
underlying trend growth.

Most other studies reviewed as part of this analysis have worked
on the premise that the reduction in tax is fed through completely
to a reduction in fares. In the context of this study, this relates
to Scenarios 1a, 2a and 3a (i.e. full pass-through), and the
analysis here suggests that these scenarios produce the smallest
GVA / jobs impacts. In
this analysis, a supply side response (i.e. new routes) has been
assumed where there is a partial or a zero pass-through of the tax
cut to fares, and this supply side impact is greater than the fares
elasticity effect associated with full pass-through of fares.

The results presented here are therefore sensitive to the
assumed supply side response, but it should be noted that the
supply side response assumptions used are conservative in the
context of the public statements already made by airlines such as
easyJet and Ryanair, where figures of 30% or more have been quoted.
Nevertheless, there is a high degree of uncertainty surrounding
this supply side response, which could be greater or less than that
assumed here. Obtaining a substantial supply side response from the
airlines would be the prime objective of the policy and source of
benefits, and it is noted that this is not something which is under
Government control.

The most likely outcome in any of these scenarios is therefore
perhaps Variant B which would see a mixture of some reductions in
fares and some additional route development. The response is likely
to vary by airline type, with e.g. low cost carriers perhaps
responding more on the supply side and less on fares (i.e.
Scenarios 1c, 2c, 3c) and network carriers perhaps passing on the
tax reduction and responding less on the supply side (i.e.
Scenarios 1a, 2a, 3a).

The benefits associated with additional inbound tourism are a
major component of the economic benefits identified. The figures
estimated here relate to additional inbound tourism and we have not
attempted to quantify the potentially offsetting negative economic
impact of increases in outbound tourism from Scotland’s
residents, given the complexities and lack of relevant data.
However, this in itself should be offset against the other benefits
residents of Scotland gain from overseas leisure travel. Finally,
to not pursue a policy on these grounds would be tantamount to
advocating reducing international connectivity (or at best stifling
it) to enhance domestic economic performance, which would seem
perverse in an era where greater connectivity is seen as
essential.

Any analysis, such as this, is subject to a wide range of
caveats and uncertainties. These have been set out in this report
but should be borne in mind when interpreting the results. The key
uncertainties here perhaps surround:

the level of supply side response in the shape of new routes,
and the demand response to these supply uplifts, which we have
assumed to be perfectly elastic;

the response of passengers to lower fares (i.e. the
elasticities used);

the underlying growth scenario which may prove too optimistic
or pessimistic;

the degree of ‘leakage’ brought about by
additional overseas travel by Scotland’s residents;

the way in which the tax cut feeds through into responses for
airports and airline (aside from new routes);

the potential for more or fewer additional based aircraft
than assumed here, especially in the context of an expansion of
the low cost long haul sector;

developments within aviation, particularly the growth
trajectory of low cost long haul and its impact on
‘traditional’ carriers; and

the wider picture with respect to the
UK economy and
Brexit.

The impact of any cut in
ADT will
vary across the air industry, and given the complexities in
aviation economics, there is likely to be a transparency issue in
terms of the monitoring of its impact. A framework for monitoring
and evaluating the impact of
ADT has
been set out here.

A wider issue with cutting the current rates of
APD with the
introduction of
ADT is
that there will be a reduction in tax revenue in 2018-19 and
succeeding years, which will presumably be reflected in Government
spending. This immediate loss of tax revenue is offset against a
range of less tangible and less certain economic benefits as time
progresses.